“2014 is going to feel a lot like 2004 and 1994 when the [U.S.] economy surprised to the high side,” says David Rosenberg, chief economist and strategist at investment manager Gluskin Sheff + Associates. But you can avoid being surprised. The current economic and market climate, with a nod to history, offers a reliable map for the investing road ahead.

As you prepare your portfolio for 2014, consider this: U.S. stocks likely will have a good year, not a great one; stock markets in Europe and Japan seem to be on the mend, and U.S. bond holders could be on thinner ice now that the Fed has decided the U.S. economy needs less of its support.

Check out these strategies and others in our annual list of 10 investing themes for the coming year. And tell us where you’re putting money; join the conversation on Twitter at #investideas.

— Jonathan Burton

Bloomberg

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1. U.S. stocks go from great to good

The Standard & Poor’s 500
SPX, -1.42%
index is up almost 30% so far this year, including dividends. That’s not a misprint. And the slow-but-steady U.S. corporate earnings growth, relatively low interest rates, and low inflation that boosted stock prices in 2013 is likely to continue.

Still, it’s doubtful that the U.S. market benchmark will be even half as generous to stock buyers in 2014. The S&P 500 has enjoyed 20%-plus yearly gains 18 times since 1945, according to S&P Capital IQ; stocks the following year were up about 80% of the time, posting an average 10% gain. Yet unlike in 2013, such positive performance hasn’t come smoothly. Investors in each of those years endured interim market slides averaging almost 12%.

2. Bonds get riskier

With the U.S. economy evidently out of the woods, the Federal Reserve has moved to taper the bond-buying program that has subdued interest rates, supported economic growth and spurred stock prices. The prospect of a tapering hurt bond investors in 2013, and the reality is still unwelcome for bond bulls.

That said, the Fed isn’t yanking the punch bowl — at least not yet. It’s important to remember that tapering is not tightening. Both short-term interest rates and fixed-income yields are likely to move higher gradually and marginally, but remain uncharacteristically low.

For the bond portion of a portfolio, they add, consider high-yield corporate securities, which are more stock-like in nature, along with shorter-term fixed-income instruments. “Bond buyers beware,” BlackRock cautions. “There are few bargains in traditional bonds.”

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3. Big-cap stocks are better

The global economy is looking healthier. Two of its most serious cases, the euro zone and Japan, are in recovery. Research firm IHS
US:IHS
expects world economies collectively to grow a relatively modest 3.3% in 2014 versus 2.5% in 2013, with the U.S., the euro zone, the U.K. and China standing out.

Stronger global growth is good news for large U.S. companies that count on overseas demand Companies in the S&P 500, for example, average almost half of their sales from outside of the U.S. Shares of big-cap multinationals — especially those in the cyclical technology, energy and industrials sectors — also could benefit from a pickup in U.S. growth and a willingness among consumers and corporations alike to loosen their purse strings.

Small U.S. companies, by contrast, are mostly domestically focused. Moreover, these stocks have run far and fast in 2013. On a valuation basis, analysts at Bank of America Merrill Lynch favor large stocks over small. Large multinationals also frequently provide dividend income and dividend growth that can satisfy yield-hungry investors.

Bloomberg

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4. Europe is on the mend

The euro zone’s most economically troubled countries are emerging from recession. The European Central Bank is committed to keeping interest rates low in a bid to spur growth, and ECB President Mario Draghi’s pronouncement in July 2012 to “do whatever it takes” to maintain the euro zone seems to have been a turning point. And the first thing stock buyers need to know is that even after double-digit 2013 gains for euro-zone and U.K. stocks, many investors are still skeptical about the region’s prospects.

Patience is needed with Europe, but a growing number of analysts expect that investors will be rewarded for it. “A longer and more sustainable rally will play out in 2014,” notes John Bilton, European chief investment strategist at Bank of America Merrill Lynch. European companies today are recovering in similar fashion to their U.S. peers, says Jonathan Ingram, a manager of the JPMorgan Intrepid European Fund
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Euro-zone businesses are regaining competitiveness, he notes. Ingram predicts that Europe’s domestic companies in particular will see better-than-expected top-line growth in the coming year, with broad euro-zone stock indexes gaining 10% to 12%.

Shutterstock.com

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5. Japan continues to rebound

Japanese Prime Minister Shinzo Abe’s year-old government, in concert with the Bank of Japan, is attempting to reflate Japan’s long-moribund economy with deflation-fighting tactics — dubbed “Abenomics” — that are largely aimed at encouraging Japanese to spend more and to invest in stocks and other riskier assets.

“You’re finally starting to see a consensus, even in the elderly population who benefit from deflation, that it can’t go on forever,” says Paul Zemsky, chief investment officer of multiasset strategies at ING U.S. Investment Management. Accordingly, “Don’t fight the Bank of Japan” is sound advice nowadays, much as U.S. investors are told “Don’t fight the Fed.” Yet Abenomics is a work in progress, and 2014 should give investors a clearer sense of Abe’s sincerity and chance for success.

Investors should understand that Abenomics weakens the yen, which means that gains from Japanese stocks are worth less in U.S. dollars. The opposite is true when the yen strengthens versus the dollar. So consider exchange-traded funds and mutual funds that carry no currency risk, such as WisdomTree Japan Hedged Equity Fund
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This ETF’s portfolio also is heavy on Japanese exporters, which stand to benefit from a weaker currency.

Bloomberg

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6. ‘Made in America’ waves the flag

U.S. companies are finding that you can go home again. Many manufacturers are bringing factory production — and jobs — back to the U.S. from China. U.S. workers are highly skilled and their salaries are competitive with China, which has seen wages soar. Low U.S. energy and transportation costs are also attractive. U.S. industrial production in November hit a record high, led by motor vehicles and parts. Moreover, Americans are spending more on U.S.-produced goods and services and less on imports. Look for continued import substitution in the year ahead, which would benefit the industrials and consumer sectors and the U.S. job market.

This “Made in the U.S.A.” investment theme is still in its early stages, says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. The next leg of economic growth, she predicts, favors both large- and small-company stocks in cyclical sectors including engineering and construction, transportation, autos, manufacturing and energy. Says Sonders: “The economy is on a path to producing stuff again.”

Getty Images

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7. U.S. energy independence powers up

The U.S. is increasingly energy independent, and this remarkable development is a game-changer not just for oil and gas producers but for the global economy. Cheaper energy gives U.S. companies a sizeable competitive advantage over rivals in Europe, Japan and emerging markets. U.S. exporters in key areas including chemicals, machinery and transportation equipment are benefiting from streamlined costs, according to Boston Consulting Group.

Domestically, energy independence eases the strain on household budgets and spurs consumer confidence. U.S. oil production in October exceeded imports for the first time in almost two decades, according to the U.S. Energy Information Administration. U.S. oil output is expected to top Saudi Arabia’s by 2016 , the International Energy Agency reports. The trend bodes well for companies involved with building and maintaining energy infrastructure and providing the supporting technology.

Yet the energy sector has lagged the broad U.S. market and is unpopular with investors, despite these stocks benefitting from accelerated global growth and offering attractive dividend yields. Money managers significantly underweight the energy sector in portfolios and the group’s valuation is low based on book value, cash flow and earnings growth, according to Bank of America Merrill Lynch analysts. “One of the reasons we like energy,” the analysts note, “is because it’s so hated.”

AFP/Getty Images

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8. Gold stays tarnished

Gold
US:GCG4
has lost its Midas Touch, and with the U.S. dollar strengthening and much of the world economy on a slow-growth, low-inflation trajectory, already depressed gold prices are likely to fall further in 2014. “You would want gold in an inflationary environment,” says Linda Duessel, a senior equity market strategist at Federated Investors, “ and we don’t have that.”

Indeed, in mid-November the World Gold Council reported that physical demand for gold in the third quarter fell 21% from the same time a year ago. Gold will stay under pressure in 2014, analysts at Merrill Lynch Wealth Management noted, citing a lack of emerging-market demand and an excess of supply.

In a dramatic turnabout, the gold bears are crushing the gold bugs. Shares of gold miners have been hit especially hard. Societe Generale analysts recently told investors to “go short” on gold because there’s “more pain for gold, with prices seen at $1,050 an ounce by the end of 2014.” Adds David Rosenberg, chief economist and strategist at Toronto-based money manager Gluskin Sheff + Associates: “The technical picture [for gold] is just too ugly.”

Bloomberg

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9. Bank on U.S., European financial stocks

Higher interest rates in the U.S. would favor banking companies, which benefit from a climate where short-term deposit rates stay low and longer-term lending rates rise. An improved U.S. economy, meanwhile, puts people to work and supports credit card issuers, and a stronger stock market boosts asset managers.

“Banks have cleaned up their balance sheets, and while loan growth remains tepid, lending should continue to pick up as credit conditions ease,” Bank of America Merrill Lynch strategists observed. This year should see the fewest U.S. bank failures since 2007. Smaller regional banks are generally in stronger financial shape than larger banks, says Richard Bernstein of investment manager Richard Bernstein Advisors, who expects small-cap bank stocks to lead the group.

The upbeat outlook for Europe’s financial sector hinges on the end of recession in the euro zone and growing business confidence across the region, including the U.K. Many banks in Europe are trading below book value and should see higher valuations in the year ahead, says Rudolph-Riad Younes, co-manager of RSQ International Equity Fund. He favors leading banks in Spain and the U.K., along with relatively more stable lenders in Northern Europe and Scandinavia. “U.S. banks and European banks will be sectors to be in for the next three years,” Riad Younes says.

Bloomberg

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10. Consumer stocks cash in

The U.S. consumer is alive and well. Americans are more optimistic about the economy and increasingly confident about keeping or getting a job. People are buying cars, clothing and taking cruises. They’re spending on electronics, appliances and home improvement. Bank of America Merrill Lynch Global Research expects growth in consumer spending to increase 2.6% in 2014 from 1.9% in 2013, supported by a “sweet spot of a stronger economy, moderate inflation and historically low but gradually rising interest rates.”

Yet while consumer sentiment is encouraging, consumer stocks have plenty of detractors. The economically sensitive consumer discretionary sector has outperformed the broad U.S. market in 2013, so its valuation seems a bit stretched. Consumer staples, meanwhile, have lagged the market but this traditionally defensive sector seems out of step with the growth-oriented stock strategies that are expected to define 2014.

To get the most out of consumer stocks next year, analysts at S&P Capital IQ suggest focusing on household products and soft drink companies in the staples sector, while the media, autos, housing, retail, restaurants, hotels and leisure businesses — particularly stocks with an international footprint — should buoy the consumer discretionary group.

Bloomberg

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10. Consumer stocks cash in

The U.S. consumer is alive and well. Americans are more optimistic about the economy and increasingly confident about keeping or getting a job. People are buying cars, clothing and taking cruises. They’re spending on electronics, appliances and home improvement. Bank of America Merrill Lynch Global Research expects growth in consumer spending to increase 2.6% in 2014 from 1.9% in 2013, supported by a “sweet spot of a stronger economy, moderate inflation and historically low but gradually rising interest rates.”

Yet while consumer sentiment is encouraging, consumer stocks have plenty of detractors. The economically sensitive consumer discretionary sector has outperformed the broad U.S. market in 2013, so its valuation seems a bit stretched. Consumer staples, meanwhile, have lagged the market but this traditionally defensive sector seems out of step with the growth-oriented stock strategies that are expected to define 2014.

To get the most out of consumer stocks next year, analysts at S&P Capital IQ suggest focusing on household products and soft drink companies in the staples sector, while the media, autos, housing, retail, restaurants, hotels and leisure businesses — particularly stocks with an international footprint — should buoy the consumer discretionary group.

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